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It is May 2017 and Fan Milk Ghana has just signed a contract for the purchase of equipment from a supplier in Germany. The cost

It is May 2017 and Fan Milk Ghana has just signed a contract for the purchase of equipment from a supplier in Germany. The cost of the equipment is 1 million and payment is due in 6 months' time.

Additional information is as follows:

  • The current spot exchange rate is GH 4.50/.
  • Interest rate on the euro is 2% per annum
  • Interest rate on the cedi is 20% per annum
  • Fan Milk Ghana has access to at the money OTC options on euros, expiring 6 months from now. The premiums for the options are as follows:
  • o Call - a premium of GH 0.10/. o Put - a premium of GH 0.06/.
  • Required:
  1. Provide a qualitative description of Fan Milk's exchange rate exposure if it decides not to hedge?

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